Po;;;;;Research 2 O7% PAPERS World Development Report Office of the Vice President Development Economics The World Bank October 1992 WPS 1002 Background paper for World Development Report 1992 World Fossil Fuel Subsidies and Global Carbon Emissions Bjorn Larsen and Anwar Shah Removing world energy subsidies - estimated at US$230 billion - could reduce global carbon emissions by 9 percent. PoQIcy RcachWodingP pmdisai;ntbflncdingsof woak in prgress and ncourage th cgwo af idesmgBan staff and aUlotdicrsintcsodtnvociopnctscpappsp,distdisutodby theRscschAdvismy Staff.c yhenaacrofthcaua i.refloct onlydleiwstandshoudbcusedmdcitdo nliy.scwtnydingshpnttion5.andc onswam thoeown.Theyshould not be aibtod to the World Buaks its Boad of Di,eo its managaneat, or any of its member countic. | ~~Policy Research WrdDevelopment Report WPS 1002 This paper- a product of the Office of the Vice President, Development Economics -is one in a series of background papers prepared forthe WorldDevelopmentReport 1992. The Report, on development and the environment, discusses the possible effects of the expected dramatic growth in the world's population, industrial output, use of energy, and demand for food. Copies of this and other World Development Report background papers are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact the WorldDevelopment Report Office, room T7-101,extension 31393 (October 1992, 31 pages). Larsen and Shah present evidence on the level of consumption. Net fossil fuel importers in Japan, fossil fuel subsidies and their implications for the United States, and Western Europe are carbon dioxide emissions. They conclude that estimated to experience welfare gains of about substantial fossil fuel subsidies prevail in a US$14 billion, while welfare effects would be handful of large, carbon-emitting countries. negative in exporting countries in the event of a Removing such subsidies could substantially dampening effect on world fossil fuel prices reduce national carbon emissions in some coun- associated with the removal of subsidies. tries. Global carbon emissions could be reduced by 9 percent, assuming no change in world fossil fuel Eliminating these subsidies would translatte prices, and by 5 percent when accounting for into an average 21 percent reduction in carbon estimated changes in wodd pinces. emissions in the subsidizing countries, or 20 percent of OECI) emissions. To achieve an Larsen and Shah estimate world energy equivalent reduction in tons of emissions in the subsidies to be more than US$230 billion. The OECD countries would require imposing a welfare costs of these subsidies are more than carbon tax of $604$70 per ton of carbon, even US$20 billion, not including the cost of green- when accounting for estimated changes in world house gas and local pollution from fossil fuel fossil fuel prices. The Policy Research Working PapSeriesdisseminates thefindings of work under way in theBank. Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papvrs do not necessarily represent official Bank policy. Produced by the Policy Research Dissemnination Center WORLD FOSSIL FUEL SUBSIDIES AND GLOBAL CARBON EMISSIONS Bjorn Larsen and Anwar Shah' 'Public Economics Division, The World Bank, Room N10-053, Washington, D.C. 20433. The authors are grateful to Messrs Lawrence H. Summers and Andrew Steer for guidance, comments and support, and to David Pearce, Jim Poterba, and Dennis Anderson for additional comments. The World Development Report 1992, "Development and the Environment," discusses the possible effects of the expected dramatic growth in the world's population, industrial output, use of energy, and demand for food. Under current practices, the result could be appalling environmental conditions in both urban and rural areas. The World Development Report presents an alternative, albeit more difficult, path - one that, if taken, would allow future generations to witness improved environmental conditions a.-.ompanied by rapid economic development and the virtual eradication of widespread poverty. Choosing this path will require that both industrial and developing countries seize the current moment of opportunity to reform policies, institutions, and aid programs. A two-fold strategy is required. * First, take advantage of the positive links between economic efficiency, income growth, and protection of the environment. This calls for accelerating programs for reducing poverty, removing distortions that encourage the economically inefficient and environmentally damaging use of naturai resources, clarifying property rights, expanding programs for education (especially for girls), family planning services, sanitation and clean water, and agricultural extension, credit and research. * Second, break the negative links between economic activity and the environment. Certain targeted measures, described in the Report, can bring dramatic improvements in environmental quality at modest cost in investment and economic efficiency. To implement them will require overcoming the power of vested interests, building stroiig institutions, improving knowledge, encouraging participatory decisionmaking, and building a partnership of cooperation between industrial and developing countries. Other World Development Report background papers in the Policy Research Working Paper series include: Dennis Anderson, "Economic Growth and the Environment" Dennis Anderson and William Cavendish, "Efficiency and Substitution in Pollution Abatement: Simulation Studies in Three Sectors" William Ascher, "Coping with the Disappointing Rates of Return of Development Projects with Environmental Aspects" Edward B. Barbier and Joanne C. Burgess, "Agricultural Pricing and Environmental Degradation" Robin W. Bates and Edwin A. Moore, "Commercial Energy Efficiency and the Environment" Wilfred Beckerman, "Economic Development and the Environment: Conflict or Complementarity?" Richard E. Bilsborrow, "Rural Poverty, Migration, and the Environment in Developing Countries: Three Case Studies" Charles R. Blitzer, R.S. Eckaus, Supriya Lahiri, and Alexander Meeraus, (a) "Growth and Welfare Losses from Carbon Emission Restrictions: A General Equilibrium Analysis for Egypt"; (b) "The Effects of Restrictions of Carbon Dixide and Methane Emissions on the Indian Economy" Judith M. Dean, "Trade and the Environment: A Survey of the Literature" Behrooz Guerami, "Prospects for Coal and Clean Coal Technology" David 0. Hall, "Biomass" Ravi Kanbur, "Heterogeneity, Distribution and Cooperation in Common Property Resource Management" Arik Levinson and Sudhir Shetty, "Efficient Environment Regulation: Case Studies of Urban Air Pollution" Robert E.B. Lucas, David Wheeler, and Hemamala Hettige, "Economic Development, Environmental Regulation and the International Migration of Toxic Industrial Pollution: 1960-1988" Robert E.B. Lucas, "Toxic Releases by Manufacturing: World Pattems and Trade Policies" Ashoka Mody and Robert Evenson, "Innovation and Diffusion of Environmentally Responsive Technologies" David Pearce, "Economic Valuation and the Natural World" Nemat Shafik and Sushenjit Bandyopadhyay, "Economic Growth and Environmental Quality: Time Series and Cross-Country Evidence" Anwar Shah and Bjorn Larsen, (a) "Carbon Taxes, the Greenhouse Effect, and Developing Countries"; (b) "World Energy Subsidies and Global Carbon Emissions" Margaret E. Slade, (a) "Environmental Costs of Natural Resource Commodities: Magnitude and Incidence"; (b) "Do Markets Underprice Natural Resouce Commodities?" Piritta Sorsa, "The Environment - A New Challenge to GATT?" Sheila Webb and Associates, "Waterborne Diseases in Peru" Background papers in the World Bank's Discussion Paper series include: Shelton H. Davis, "Indigenous Views of Land and the Environment" John B. Homer, "Natural Gas in Developing Countries: Evaluating the Benefits to the Environment" Stephen Mink, "Poverty, Population ard the Environment" The,adore Panayotou, "Policy Options for Controlling Urban and Industrial Pollution" Other (unpublished) papers in the series are available direct from the World Development Report Office, room T7-101, extension 31393. For a complete list of tiiles, consult pages 182-3 of the World Development Report. The World Development Report was prepared by a team led by Andrew Steer; the background papers were edited by Will Wade-Gery. TABLE OF CONTENTS I. Introduction ............ I1 II. Existing fossil fuel pricing regimes and world subsidies . III. Implications for greenhouse gas emissions. 7 1. No world price effects. 7 2. World price effects. 9 IV. Welfare costs of fossil fuel subsidies .14 Case I. No change in world prices .15 Case II. Change in world prices .16 V. Potential foreign inducement for removal of subsidies .20 VI. Summary and conclusions .22 References .24 Appendix A. 26 Appendix B. 27 1. Carbon Emissions from Fossil Fuel Combustion. 3 2. Total Subsidies (million $US). 5 3. Emission Reductions .10 4. Welfare Impacts of Subsidy Removal .18 5. Carbon Tax in OECD Countries .22 Figures 1. Impact of Subsidy Removal (in subsidizing country) .1 2. Impact of Subsidy Removal (world market) .11 3. Welfare Gain from Subsidy Removal .17 4. Welfare Effect of Subsidy Removal .19 Charts 1. Ratio of Domestic Prices to World Prices. 6 WORLD FOSSIL FUEL SUBSIDIES AND GLOBAL CARBON EMISSIONS I. Iptroductionx It has been argued that economic policies to protect local and global environments should, first and foremost, remove fossil fuel subsidies (see Summers, 1991, Churchill and Saunders, 1991, Larsen and Shah, 1992a, 1992b and Shah and Larsen, 1992a, 1992b). Unfortunately, the available literature does not document in any meaningful detail the level of worldwide subsidies on fossil fuels, the impact of *heir removal on world energy markets, global carbon emissions and aggregate welfare in subsidizing and non- subsidizing countries.2 This paper attempts to correct these deficiencies. Section n reviews existing fossil fuel pricing regimes and estimates the level of world fossil fuel subsidies. Section III develops a simple framework for estimating the impact of subsidy removal on global carbon emissions. A first estimate of carbon emission reductions is based on the assumption that world prices of fossil fuels do not change in response to the demand reduction in subsidizing countries that results from the removal of subsidies. Subsequently, world price effects and fossil fuel consumption in non-subsidizing countries are estimated using a simple model of global fossil f .el markets. Section IV estimates welfare gains that result from fossil fuel subsidy removal: first, on the assumption that world prices are unchanged for both subsidizing and non-subsidizing countries; second, on the assumption that such prices do change. Section V estimates what level of OECD carbon taxes would be required to achieve world emission reductions equal to those resulting from the removal of subsidies. Section VI presents a sunimary and conclusions. 11. Existing fossil fuel pricing regimes and world subsidies Correct fossil fuel prices are a prima facie first order priority in any economic policy to curtail greenhouse gas emissions. This section explores the potential for correct fossil fuel prices by analyzing pricing practices around the world. Although a complete inventory of worldwide fossil fuel subsidies is beyond the scope of this study, it is possible to obtain a reasonable estimate of the overall level of subsidies by studying only a small set of countries. For example, 90% of world coal production is 2 A number of recent studies have reflected upon various aspects of this question: Kosmo (1989) estimates the level of subsidies for a large sample of developing countries primarily for petroleum products and electricity; Sterner (1989) presents a time series of domestic petroleum product prices relative to world prices for Latin American countries; and Burgess (1990) evaluates potential carbon dioxide emission reductions from efficient electricity pricing in a sample of countries including the United States, China and India. consumed by 15 countries; 80% of world petroleum products by 28 countries; and 91 % of world natural gas output by 20 countries (see Table 1). These countries are collectively responsible for 8'% of fossil fuel carbon emissions. Roughly one half of coal and natural gas consumers, and one fourth of petroleum product consumers, are OECD countries with relatively insignificant subsidies. We define fossil fuel subsidies as te difference between domestic fossil fuel prices and their opportunity cost evaluated at end-user prices. When fuels are traded internationally, border prices serve as opportunity cost: this is the case for petroleum products for all sample countries. Opportunity costs at end-user level are border prices plus a mark-up for distribution. U.S. pre-tax end-user prices of petroleum products by sector are used as proxies for opportunity cost at end-user level, although unit distribution costs may vary across countries to some extent. Natural gas and coal are traded less frequwiitly than oil/petroleum products and natural gas markets are primarily regional in character. Border prices plus distribution costs are used if these fuels are imported or if there are export markets - as for the former Soviet Union in the case of natural gas, and to a lesser extent coal. Long run marginal costs are used for coal in the cases of China and India and for natural gas in Argentina? For purposes of convenience, opportunity cost is henceforth referred to as world price. Exchange rates reported in the IMF's International Financial Statistics have been used to convert domestic currency figures to dollars. Thus, total subsidies Sk for country k are given as: Sk = Ei Ej (p ,j-p0e)qij (1) where p, is domestic end-user price of fossil fuel i in sector j, pw.j is opportunity cost of fuel i in sector j in US dollars, e is the exchange rate in units of US dollars to domestic currency, and u% is domestic consumption of fuel i in sector j.4 According to (1), total subs-dies are the product of the price differential and quantity consumed at subsidized prices. Since the efficiency cost of subsidies is defined as the difference between total subsidies and the increase in consumer surplus, there is no need to apply price elasticities of demand in order to calculate subsidies. If total subsidies were calculated on the basis 3 Although it is possible that China could perhaps increase exports to South Korea, Hong Kong and Japan. 4 Sectors include electricity generation, industry, transport, households and a residual sector. Subsidies on outputs or complementary inputs to energy in any of these sectors would act as "implicit" subsidies on energy because more energy would be used than at efficient input and output prices. We do not attempt to account for such inefficiencies. 2 Table 1. Carbon Emissions from Fassil Fuel Combustion Cabon emiuion fram petnAlum product' (1917) Carbon enussios from coal (1987) Catbon emasion from naur pas (1987) 000 % of world * wmlaivo 000 5 of wod cumulative 000 % of cunuaie o1u emDisi o MI IO S United Stes 545300 23.81% 23.S1% China 47900 20.71X 20.71% USSR 302400 34.0S% 34.05% USSR 339200 14.81% 38162% Unied9 st 465800 20.14% 40.85% Uniwedsate 235000 26.46% 60.52% 1aa 139400 6.09% 44.71% USSR 371300 16.05% 56.90% Unied ngdom 31000 3.49% 64.01% aii" U3600 3.65% 48.36% Polad IO600 4.70% 61.60% CMda 29600 3.33% 67.34% Genmny.Weat 73200 3.20% 51.56% india 1OSSO0 4.69% 66.29% Genamy. Wea 25600 2.88% 70.23S Ialy 63000 2.75% 5431% Gemany, Wed 71S00 3.39% 69.68% J 2S200 253% 72.75% Mexico 57900 2.53% 56.84% Japan 75200 3.2S% 72.93% Rania 22000 2.48S 75.24% Frnce 56000 2.45% 5928S Gemray, Eau 72300 3.13% 76.06% Neestanda 21000 236% 77.60% Canada 52400 2.29% 61.57% Unid Kingdom 71000 3.07% 79.13% s1y 19000 2.14% 79.74* UnitedKngda. 52000 2.27% 63.84S SuthfMica 66600 2.S 2.01% France 14000 15% 81.32% Brzil 313O 1.67% 65.51% Ccboldovskis 46200 2.00 84.00S Mexico 1600 153% 12.SS% nil 33700 1.47% 66.9S% NNor Koa 36423 1.57% 85.58% Sai Anbia 1200 135% 84.20% Saudi Aabia 32000 1.40% 6138% Aatai 35100 1.52% 87.10% Venehsta 10731 1.21% SSAIS ran 26000 1.14% 69.52% Canada 7100 1.175 88.27% Argent lo100 1.13% M654% Spain 250O0 1.09% 70.61% Souds Koea 23700 1.02% 929% AMgmi 9000 l.OX 47.55S Auakia 20800 0.91% 71.52% ken 400 0.95% 8.49% Indoneia 20586 0.90% 72.42% Wodd 2313000 Angralls 7900 t .89% 8938S SOU&hoA 20000 0.87% 73.29% Canm 7300 0.82% 90.21% Argetn 17000 0.74% 74.03% Unitd Aab Enir. 7100 O.OS 91.01% Tuke 16000 0.70% 74.73% Egypt, A*b Rep. 15966 0.70S 75.43% Ronmai 13OW 0.57% 76.00% BDegium 13000 0.57% 76.56% GeMan. Eat 12800 0.56% 77.12% Czeboaos 12600 0.55% 77.67S Venezea 12473 0.54% 78.22% Blgaia 12000 0.52% 7t.74% Pdlnd 11600 051% 79.25% Wodd 2290000 Suc: Wod ResOu Inatitut(1991) of consumption at non-subsidized prices, they would be less than the increase in consumer surplus, and welfare would therefore be higher with a subsidy. Total subsidies by fuel and country are presented in Table 2, and ratios of domestic prices to world prices in Chart I and the appendix tables. The former Soviet Union accounts for more than two- thirds of total world subsidies. This is to be expected given that domestic prices are low relative to world prices, and the fact that the Soviet Union accounts for approximately 20% of world fossil fuel consumption. Estimates of subsidies in the Soviet Union are highly uncertain. Although there is general agreement that substantial subsidies prevail, it is not clear what exchange rate should be used to convert figures to US dollars for the sake of comparison with world prices. Domestic prices for the former Soviet Union are from January 1992, and the exchange rate used is the commercial rate as of January 1992 - Rb 55 per US dollar. The commercial rate is the rate used for most international trade transactions and is therefore appropriate for this case. It could be argued that the ruble is still overvalued at the commercial rate. However, using an exchange rate of greater than 55 rubles per US dollar will not significantly affect total estimated subsidies.5 China follows with the second highest level of energy subsidies. Coal subsidies in China were significantly higher a few years ago (Bates and Moore, 1992) before the introduction of the two-tier pricing system, which permits a large proportion of coal to be traded at market prices. Subsidies on petroleum products are considered larger than those on coal (Haugland and Roland, 1990). Poland follows closely behind with substantial subsidies on coal. However, petroleum products in Poland do not receive any significant subsidies and gasoline is taxed. Worldwide, petroleum products are the fuel most heavily subsidized, accounting for more than 55% of total world subsidies, followed by coal (23%) and natural gas (21%). Among petroleum products, fuel oils receive the largest subsidies in dollar value. Gasoline is often taxed even in countries where there are substantial subsidies on other petroleum products. For petroleum products, the ratio of domestic to border prices is based on subsidized products only and excludes taxed petroleum products (see Chart 1). Thus the low domestic price to border price ratio for India reflects low domestic prices of kerosene and LPG, although other petroleum products are taxed. In the case of Brazil, gasoline is substantially taxed, but other products are subsidizce. Venezuela has s For illustration, suppose world price is $ 1. At 55 Rb/US$, price in the former Soviet Union is less than $ 0.1 and unit subsidy is more than $ 0.9. At 110 Rb/US$ price is less than $ 0.05 and unit subsidy more than $ 0.95. Thus by doubling the exchange rate total subsidies would only change by 5.5%. Table 2. Total Subsidies (mUlions U.S.S) No wodd price effect: Wodd price effect Subsidies Subsidies Coal Gas PAuleum ToWl Coal Gas Petmleum TOtal Former USSR 33415 44783 94250 172449 30312 33310 87902 151523 China 3389 378 10300 14067 1618 378 9033 11029 Poland 7868 980 620 9468 6928 513 496 7937 Czechoslvakia 3500 350 3850 3082 321 3403 Brazil 3700 3700 1196 3196 Venezuela 3500 3500 ,227 3227 Mexico 3000 3000 2583 2583 India 906 1675 2581 365 1473 1838 Indonesia 2500 2500 2174 2174 lKA Saudi Anbia 2200 2200 1848 1848 Argentins 400 1600 2000 400 1403 1803 South Africa 1932 1932 1609 1609 Egypt 800 800 698 698 Subtoul 51011 46541 124495 222047 43915 34601 114353 192868 Subsidies - Nonsample 8000 800 countries Total 230000 201000 Source: Authors' calculations. Chart 1 Ratio of Domestic Prices to World Prices I~~~~ ~ ~~ __ ____ ___ ._________ __________ (AAL) 3} Fi* France (A) tS 2 ~~~~~~~~~~~~~~~~~~~Unftedn lgndom(ALL * Japan Unitd lCndgom * Unied Sttes (ALL) Un_d 1tn *u s Unned Cndgorn, * Thalbnd, Phlflppines Chle (ALU UndStatesnd (F *Saudi Ambia (0,0) C')~~~~~~~~~Cf j!l ; Ar;Cnq FW ; * ::::t = d~~~~~~~~~~Argon (F L 3 . ~~~PoMc Czb"oaf tni " * Czechtosvakla (F) * Venezuela (ALL) *Forme USSR . O * Fofma USSR a Formw USSR (AL4 Coal Natural Gas Petro?eum Vroducts * For developing countries, selected petroleum products are mainly fuel oils, gasolnel soften taxed and In those cases not Include3. For industral countries, however, all petroleum products wre include F d Petroleum Products: ALL - Welshted Avg. of all petroleum products F Fuel90ils K -Kerosene Uquified petroleum gas I asoline D - utomothe diesel Source: Authors' calculations. substantial subsidies on all petroleun products. Gasoline prices in Mexico and Indonesia are close to border prices, but substantial subsidies exist on other petroleum products. Saudi Arabia taxes heavy fuel oil (light fuel oil prices are close to border prices), but has high subsidies on all other petroleum products. Czechoslovakia subsidizes only light fuel oils (besides coal) and gasoline prices are 2.8 times higher than border prices. Calculations presented in Table 2 place the level of total world fossil fuel subsidies at approximately US $230 billion, which corresponds to 20-25% of world fossil fuel consumption at current world prices. m. Implications for Mgeenhouse gas emiss^-ns Removal of fossil fuel subsidies will presumably induce reductions in fossil fuel consumption and therefore carbon emissions in subsidizing countries. Conversely, consumption in non-subsidizing countries could increase if reductions in fossil fuel demand in subsidizing countries lower world prices. Furthermore, if domestic prices are below world prices because of price ceilings that are effective for producers as well as consumers, then removing such ceilings may have positive supply effects that could further reduce world prices. On the other hand, because removing producer subsidies will tend to reduce supply, we assume that the combined effect of removing of producer ceilings and subsidies is to leave supply unchanged - as far as subsidies are concerned, we therefore ignore the supply side in subsidizing countries. The extent to which reduced demand in subsidizing countries impacts on world prices and thus on increased demand in non-subsidizing countries can be expected to differ for each fossil fuel. The first part of this section estimates carbon reductions assuming no change in world prices. The last part estimates world price effects and their impact on demand for each fossil fuel in subsidizing and non-subsidizing countries. 11.1. No world price effects The magnitude of carbon reductions that result from the removal of fossil fuel subsidies clearly depends on the relevant price elasticities of demand. Bohi (1981) presents a comprehensive survey of price elasticities of energy demand. Long run elasticities are in the range of -0.5 to -1.0 for natural gas, -0.7 to -1.5 for petroleum products, -0.5 to -1.0 for coal, and -0.5 to -1.0 for electricity. In a cross sectional study of OECD countries, Hoeller and Wallin (1991) estimate the long-run price elasticity of carbon demand at -1.04. These elasticity estimates are only valid for marginal price changes. In countries where subsidies are high, such as the former Soviet Union, elasticity estimates for marginal price changes cannot be used to estimate emissionreductions. Instead, much smaller elasticities must be considered. The elasticities used in most of the cases considered here range from -0.15 to -0.25, and to - 0.6 where subsidy levels are low (see tables in appendix). The analysis ignores interfiiel substitution. For the former Soviet Union, where fossil fuels are subsidized across the board in almost the same proportion, this is an unproblematic assumption. However, in other countries (accounting for some 30% of carbon emissions reductions), to the extent a potential for interfuel substitution exists, the estimates of emission reductions presented here may be too high. Estimates of emission reductions resulting from the removal of subsidies can also be in serious error for countries where supply exceeds demand at low prices and is therefore completely inelastic - as may be the case for natural gas in particular. In Argentina, China, and Poland, demand for natural gas is considered to be cons#.rained by supply. Within a certain range, therefore, an increase in natural gas prices may not have any significant effect on natural gas consumption. Factoring out emission reductions resulting from natural gas price increases in these three countries would have only a minor effect on the overall estimate for global carbon emissions reductions. Since, in the case of the former Soviet Union, the share of natural gas in total energy consumption is as large as that of petroleum products and coal, it is not unrealistic to assume that natural gas price increases will lead to reduced natural gas consumption. We assume a constant own price elasticity of demand, -e (e > 0), with an inverse demand function, p(q). = c q-"' (2) where q is consumption of fossil fuel, p is the domestic unit price of q, and c is a constant determined by the initial equilibrium.' If (p,, q,) is the initial equilibrium at subsidized prices, p,, and (p,, qj) is the equilibrium that would prevail if domestic prices were raised to world prices, p,, the percentage reduction in fossil fuel consumption that results from raising prices from p, to p, is, (q, - q.)/q, = 1 - (P,/p)' (3) 6 Equation (2) is derived from the differential equation that defines elasticity, (pIqJ(8q/Ip) = -e a Estimates of carbon emission roductions resulting from subsidy removal are presented by country in Table 3, and by country and fuel in the appendix. Subsidy removal could result in a 9% reduction in world carbon emissions. In terms of potential national carbon emissions reductions, the former Soviet Union is ranked first with 33% reductions, followed by China and Poland. Although emission reductions of 33% may appear unrealistically high, even after such reductions carbon intensity in the former Soviet Union would still be significantly higher than in other middle income countries or the OECD.7 111.2. World price effects Large reductions in fossil fuel demand in subsidizing countries may have significant effects on world or regional prices and therefore on demand in non-subsidizing countries. We consider only those world price effects that arise from changes in fossil fuel demand caused by removing subsidies. Although changes in the relative prices of other goods may affect consumption patters, this is ignored - even though such changes may to some extent affect fossil fuel consumption since fossil fuels are inputs in their production. We assume world prices, p, are determined by supply and demand in the long run, and define linear world demand and supply functions, qD =aD - bDp (4) u,s =ea + bsp where qu = qDI + qD2, with qD1 and qD2 linear demand functions for subsidizing and non-subsidizing countries respectively, and similarly for qs. Price equilibrium in the market is, p = (aD - a8)/(b + bV) (5) corresponding to p in Figure 1. Emission reductions resulting from subsidy removal (but estimated without taking account of world price effects) correspond to a movement from a to b in Figure 1. This movement is equivalent to an inward shift in the world demand curve in Figure 2, here noted as a change in aD. Thus OaD is tons of reduction of carbon or fossil fuel consumption assuming no world price 7 Carbon intensity is defined as the ratio of tons of carbon emitted per dollar of GDP. 2 Table 3 Emission Reductions No world price effect: World price effect: emission % emission % reduetion reduetior mdugtion reduction Pormer USSR 330688 33% 318062 31% China 62814 11% 40063 7% Poland 25111 20% 23171 18% India 10779 7% 5191 4% South Africa IOS96 14% 9426 12% Czechoslovakia 10348 16% 9585 IS% Mexico S538 7% 4701 6% Brazil 4160 8% 3613 7% Argentina 3728 13% 3491 12% Venezuela 3621 IS% 3508 14% Indonesia 3189 12% 2911 11% Saudi Arabia 2910 7% 23SI S% Egypt 2032 11% 1809 9% Total 47S51S 427982 8.7% 7.8% Emissions reductions from 22000 22000 non-sample countries Grand total 497SIS 449982 9.0% 8.2% Non-subsidizing countries -186014 Net emission reductions 263968 4.9% Source: Authorm' calculations. 10Q Figure I Impact of Subsidy Removal (in subs!dizing country) p PI ..... b 0 q Emlssion reduotlons: From a to b Figure 2 Impact of Subsidy Removal (world market) p~~~~~~~~~~~~ b O a q Emission reduotions: No world prloo sefeot: a to b World price alttc: a to C effects. Differentiating (5) with respect to aD gives, aplaa = 1/ (bs + bD) which in elasticity form is, (q/p)ap/aaD = (q/p) / (bS + bD) = 1 (eS + el) = I (eP + elD[q1/ql + epD[q2/ql) or aplp = {1 / (e + e, [q,/ql + e2Djq2/qI))aa, /q (6) where e,D and e2D are absolute values of own price elasticities of demand for subsidizing and non- subsidizing countries respectively, and el is weighted average own price supply elasticity for subsidizing and non-subsidizing countries. The increase in consumption of each fossil fuel resulting from the reduction in world prices is given by, aq, = qi e,D aplp (7) for country i. The net aggregate effect on consumption (i.e., the decrease in consumption resulting from subsidy removal plus the increase resulting from reduced world prices) is, aq = aaD + E; aOq; (8) with aaD < 0, represented in Figure 2 as the movement from a to c. The following sections apply this framework to the markets for oil/petroleum products, natural gas, and coal. Oil/petroleum products: Two assumptions are made here: first, that there is a perfectly integrated world market for oil/petroleum products in which prices are determined by supply and demand in the long run; second, that a percentage change in the price of crude oil translates into an equivalent percentage change in the prices for refined products. Assuming a weighted average supply elasticity of 0.5 and a demand elasticity of 0.8 in non- subsidizing countries, world prices of petroleum products (6) are estimated to fall 6.4%. Demand elasticity in subsidizing countries are as assumed in section 111.1. Increases in petroleum product consumption, and hence carbon emissions, resulting from lower world prices are estimated by equation 12 (7) and presented in Table 3 for each of the subsidizing countties: estimates for the non-subsidizing countries are given in Table A3, in aggregate terms and by fuel. Net emission reductions in the subsidizing countries make up as much as 95% of total reductions when no world price effects are assumed. Emission increases in non-subsidizing countries amount to more than 50% of reductions in subsidizing countries. Net world emission reductions are 3.3% when world price effects are incorporated, compared to 7. 1 % when world price effects are ignored. Natural gas: The natural gas market is more regional in nature than the oil market. For the purposes of this paper, we distinguish the following natural gas markets: * The United States, Canada and Mexico; * Western and Eastern Europe, the former Soviet Union and Algeria; * Rest of the world. Tne first two markets account for more than 80% of production, consumption and trade. Furthermore, almost all trade is intra-market. We therefore assume that general equilibrium price effects will not affect prices in other regional markets. World subsidies on natural gas are primarily in the former Soviet Union and therefore our analysis will be confined to relevant European market only. Large reductions in natural gas demand in subsidizing countries may have significant effects on gas prices and consequently on demand in the corresponding regional gas market. We assume that regional prices are determined by supply and demand in the long run. We further assume that a percentage change in the price of natural gas translates into an equivalent percentage change in gas prices in all sectors of consumption. Assuming a weighted average supply elasticity of 0.5 and a demand elasticity of 0.8 for non- subsidizing countries, regional prices are estimated to fall by almost 24%. Again, demand elasticities for subsidizing countries are the same as in section Il1. 1. Similarly, increases in natural gas consumption, and thus carbon emissions, due to the reduction in regional prices are derived using equation (7) and presented in Table 3 for each of the subsidizing countries, and for the non-subsidizing countries in Table A2, in aggregate terms and by fuel. Net emission reductions in the subsidizing countries are still substantial - as much as 92% of total reductions, assuming no regional price effects. Emission increases in non-subsidizing countries are about 25% of the reductions in subsidizing countries. Net world emission reductions are 7.5%, compared to 11.6% in partial equilibrium. Coal: World coal markets are not as integrated as world oil markets, in part because of significant domestic protection in the form of producer subsidies and trade barriers. World coal trade is only 10% of world production, but is intercontinental. The United States and Australia are the largest exporters, followed by South Africa, Canada, Poland and the former Soviet Union. The largest import markets are Western Europe and Japan. Subsidy removal can be expected to have some general equilibrium price effects, but the corresponding demand effects, although difficult to quantify, are muted by protectionism. Consequently, although we estimate general equilibrium effects under the assumption of a fully integrated world coal market with no domestic protection, we keep in mind that the increase in world demand that results from a decline in world coal prices may be reduced by domestic protection. Assuming a weighted average supply elasticity of 0.5 and a demand elasticity of 0.8 in non- subsidizing countries, equation (6) implies a 8.4% fall in coal prices. Again, the demand elasticity in the subsidizing countries is the same as in section 111.1. Increases in coal consumption, or carbon emissions, due to the fall in world coal prices are estimated by equation (7) and presented in Table 3 for each of the subsidizing countries, and for the non-subsidizing countries in Table Al, in aggregate terms and by fuel. Net emission reductions in the subsidizing countries are almost 85% of total reductions, assuming no world price effects, and emission increases in non-subsidizing countries are about 36% of reductions in subsidizing countries. Thus, net world emission reductions are 4.3% if world price effects are incorporated, compared to 9.0% if world price effects are ignored. The aggregate effect of changes in all three markets would be to reduce emissions in subsidizing countries by 8.7%, assuming unchanged world prices. Accounting for reductions in world prices, and thus increased consumption and emissions in non-subsidizing countries, global emission reductions would be 4.5%. Additional emission reductions in non-sample countries accounting for 15% of global carbon emissions, and enission reductions in sample countries for which data were not available, may lead to total emission reductions of around 9%, given unchanged world prices, and 5% of world emissions, accounting for world price changes. IV. Welfare costs of fossil fuel subsidies. In the long-run, removing fossil fuel subsidies will improve welfare, assuming no changes in world prices. If subsidies are removed and world prices do fall, the welfare of fossil fuel exporters may decline. The model used here to estimate welfare effects is limited to changes in the fossil fuel markets and ignores effects from potential changes in the relative prices of other goods. Changes in welfare are 14 first estimated on the assumption of constant world prices. (If only a single "small country" eliminated subsidies, this assumption would be realistic). Welfare effects are then estimated for subsidizing and non- subsidizing countries taking into account the impacts on world prices estimated in the previous section. Welfare calculations are based on consumer and producer surpluses of fossil fuel consumption and production, an approach which assumes full employment of resources, and should therefore be considered a long-run approximation. Demand and supply elasticities are as presented earlier. Case 1. No change in world prices: Welfare measured as the sum of consumer and producer surplus at subsidized fossil fuel prices (p) is, Wp=f 'D8q-tfXS8x+pw(xl-q1) (9) where D is the inverse demand function, S is the inverse supply function, q; is domestic consumption at subsidized price p, x, is domestic production at price p, and ps,, is world price. Welfare at non-subsidized world price (pw) is, Wv=f| D8q-f fS8x+p (x -q ) (10) where q, is domestic consumption and x,, is domestic production at world price p,. Thus change in welfare from subsidy removal is, AW=W4' -W =-f" 'D8q+p.(q -q)-X-S8x+p(x-x)>O (11) This welfare effect is illustrated in Figure 3 for fossil fuel exporters and importers, with dhe shaded area (+) representing welfare gain. Approximating AW by assuming linear demand and supply functions in the relevant range gives, aW O.5(q1 - q.)(p. - p) + O.5(x. - x,)(p. - p) or AW = O.51(q1 - q.)/ql}{(p. - p)ql) + O.5((x. - xi)/x,}(p. - p)x,} (12) where the first factor in the first term is percentage change in consumption from subsidy removal, the second factor in the first term is total subsidies, the first factor in the second term is percentage change in production from subsidy removal. The latter is non-zero if domestic prices are below world prices due either to price ceilings and/or to producer subsidies. We assume that the last term is zero - i.e. that subsidy removal engenders no supply response in a subsidizing country. Total welfare gains in subsidizing countries from removing fossil fuel subsidies are more than US $33 billion (some 15% of world subsidies). Welfare gains are largest for the former Soviet Union at approximately US$ 29 billion (Table 4), a figure which amounts to 17% of its total subsidies and 88% of world welfare gains. China and Poland follow with the second and third largest welfare gains. Welfare gains by fuel are largest for petroleum products (59% of total) as a result of the enormous petroleum subsidies in the former Soviet Union. Case n. Change in world prices: We assume that all subsidizing countries remove subsidies in the same time period. Thus welfare at subsidized prices (p) is as given by equation (9) since there is no change in world prices before subsidy removal. When subsidies are removed world prices fall from pw, to p. and domestic prices are adjusted to p.. Welfare at non-subsidized prices p, is, wp ,=-f0wD8q-|f0-s8x+p.(x,-q.,) (13) where q9,. is domestic consumption and x. is production Pt new world prices pw. Change in welfare from subsidy removal is by linear approximation of D and S, AW = WO( - Wp 0 .5{(q, - q.,)/qJ}{(p., - p)q,} + 0.5{(x.. - x,)/x,}{(p.. - p)x,) + (p.- - p.)(xI - ql) (14) Ll 1b Mb MX lX a . -. .. -.- - ...... --..-- - .... Jol;.odwj MX [X Lb Mb ja jodx3 IUAOWau £plsqnS wOJJ uJUf) ajji £ a Table 4 Welfare Impacts of Subsidy Removal No wodd price effect: Wodd price effsct: Welp in So Welfrt sdnz (mil USS) (mi USS Formot USSR 29302 22195 chim 1063 471 Pobnd 944 891 IndbI 74 206 South Afuica 154 6 Czeohoulovakia 381 454 Mexico 143 -3S2 Drel 201 464 Ariodna 132 137 Venzuela 508 -155 Ioneia 194 .223 Saudi Arabia 100 -1446 Egypt 51 -167 Total 33250 22483 Wesen Burope 7010 United Staws 3975 Japan 251S Soumce: Authors' calcuatios. The two first terms are similar to those in case 1, but with new world prices and corresponding quantities of consumption and production. The last term represents an exporting country's welfare loss from lower world prices, or an importer's welfare gain from lower prices. Welfare gains (+) and losses (-) are illustrated by shaded area in Figure 4, for both exporters and importers. Welfare gains or losses resulting from the import or export effects of changed world fossil fuel prices are based on border prices for crude oil, natural gas, and coal, and not on end-user prices. If a country produces no fossil fuels, then the second term is zero and q, = 0. In this case, welfare gains for the former Soviet Union are reduced to US$22 billion, but are increased for fossil fuel importers such as India, Brazil, and Czechoslovakia. Exporters such as Saudi Arabia, Mexico, Indonesia, Venezuela, and Egypt experience a net welfare loss due to lower export prices. Note, however, that because the fall in world prices is not induced by the subsidy removal in any Figure 4 Welfare Effect of Subsidy Removal Exporter ..".~~~~~~~~~~~~~~....... < 1 'VI........ .~~ ~ I _ _ nw, q I XI XN'. Importer S W o ..'.,'' .'-.,-::: '''.... .. ' ''' ''' xy , , P ........... . .... . ... ._ .._. Y., Xw, qw' q1 one of these countries alone, welfare losses would be even larger if subsidies were not removed. Reduced world prices for fossil fuels do not leave welfare in non-subsidizing countries unaffected. Welfare change by linear approximation of D and S is, AW = Ww. - Wm = 0.5(qw. - qw,)(pw - pw.) + 0.5(xW - xw.)(p, - p,.) + (p,* - p*)(xw - qw,) (15) or AW = Wp.. - Wp. = 0.5ej(8pw/p.Yq,p, + O.5es(Op./p.)2xwp. + (p,. - p,)(x. - q.) (16) where e's are the absolute values of demand and supply elasticities. Since they all are net importers of fossil fuels, Western Europe, the United States, and Japan would see their welfare increase by more than US$13 billion. These calculations assume full employment of resources. In fact, subsidy removal may have significant short-run adjustment costs. It may not therefore be politically acceptable over a short time horizon unless some external inducement for subsidy removal is provided to subsidizing countries. This issue is considered in the next section. V. Potential foreign inducement for rem-oval of subsidies: Suppose OECD countries decide to reduce carbon emissions from fossil fuel consumption by some percentage below current levels. This may be achieved in several ways, one of which is to impose a carbon tax in the OECD countries. An alternative is to achieve equivalent reductions by paying countries that subsidize fossil fuels to remove such subsidies. While removing such subsidies would improve welfare in the long-run, there might be short run adjustment costs and distributional consequences; without compensation subsidy removal is unlikely to politically acceptable. It is, therefore, of some interest to determine: first, the level of OECD carbon taxes needed to achieve emission reductions equivalent to those achieved by subsidy removal; and second, OECD willingness to "buy" equivalent reductions from subsidizing countries. Estimated carbon emission reductions from subsidy removal are lowered if world price constancy is not assumed. Similarly, if OECD countries unilaterally reduce carbon emissions we may expect emission increases In non-OECD countries in response to reduced world prices. Furthermore, the effect on carbon emissions per dollar of carbon tax in any one OECD country will be decreased if such a tax is also imposed in all OECD countries, since world prices may fall. The net global effect of an OECD carbon tak on carbon emissions from fuel use is, aq = (es / (eS + e,D[q,/qJ + e2,[q2/q]))}aD (18) derived from (4) and (5), with aaD = 8q2 = (1 - (p/p)')q2 (19) where p and pt are weighted average fossil fuel prices in OECD countries before and after carbon tax respectively, and e is price elasticity of demand (e2D) as in equation (3). Table 5 presents a range of three cases in which price elasticity of fossil fuel demand in OECD countries varies from 0.6, through 0.8, to 1.0; supply elasticities for all countries and demand elasticities for all non-OECD countries are the same as in section HI. Using equation (8), and thus accounting for world price effects, world emission reductions from subsidy removal are estimated for each of the demand elasticities of non-subsidizing (primar^!y OECD) countries. Next, a carbon tax is estimated that provides a value for p/p, in (19) such that the value of aq in (18) is equal to world emission reductions resulting from subsidy removal. A range for aq is presented in Table 5. The lower bound assumes a demand effect in non-OECD countries from lower world prices, which would be the case if lower world prices were to translate into lower end- user prices. The upper bound assumes no demand effect in non-OECD countries, which would be the case if prices were fixed in subsidizing countries: lower world prices would not translate via the market to lower end-user prices, and there would be no demand effect in those countries. To achieve as substantial a reduction in emissions worldwide as subsidy removal, a carbon tax would need to be in the range of US $50-$90 (see Table 5). Total emission reductions in OECD countries are about 20% assuming no world price effects. Nordhaus (1991), using a survey of cost estimates of carbon reductions in several countries and regions, derives a marginal cost curve according to which a US $60 carbon tax would reduce emissions by 20%. A demand elasticity of 0.8 is therefore quite consistent with Nordhaus' marginal cost curve. Estimations presented in Table 5 suggest that a substantial carbon tax is necessary to reduce emissions by the same amount as subsidy removal. But, subsidy removal may not be politically acceptable in the short run without some form of external compensation for adjustment costs. OECD countries might therefore consider such compensation a lower cost strategy for reducing emissions than the relatively high carbon tax estimated in this section. 21 Table S Carbon Tax in OECD Countries Elasticity of danad in OECD 0.6 0.8 1.0 World emission reduction IS.% 5.0% 4.5% fiom subsidy removal OECD Caubon tax (USS/ton) for equivalent 90 65 S0 world emision reducton accounting for world price effect World emision roduclions 4.4-5.6% 4.2-5.2% 3.9-4.7% from OECD carbon tax ncoting for world price offet OECD reductions assuming 19% 20% 20% no world price effecs Source: Authors' ctimations. VI. Summary and conclusions Substantial fossil fuel subsidies prevail in a handful of large carbon emitting countries. Total world subsidies are estimated to be in excess of US $230 billion, or 20-25% of the value of world fossil fuel consumption at world prices. Removing such subsidies would substantially reduce national carbon emissions in some countries and reduce global carbon emissions by 9%, assuming no change in world prices, and by 5%, accounting for changes in world prices. Welfare gains from subsidy removal worldwide would be more than US $33 billion assuming no change in world prices, or 15% of total subsidies, even ignoring the benefits from curtailment of greenhouse gases emissions and abatement of local pollution. Welfare gains when accounting for world price changes would still be some US $22 billion in subsidizing countries. Net fossil fuel importers in Western Europe, United States and Japan would experience a welfare gain of approximately US $14 billion in the event of subsidy removal dampening world energy prices. Equivalent reductions in carbon emissions could be achieved by an OECD carbon tax on the order of US $50-90 per ton. It should be noted that neither the subsidy removal nor an equivalent carbon tax would be sufficient to stabilize global carbon emissions at 1990 levels. To 22 achieve that objective, stronger economic policy responses would be required. 23 REFERENCES Asian Development Bank (1989): Energy Indicators of Developing Member Countries of ADB. Manila, Philippines. Bates, R. and Moore, E. (1991) "Commercial Energy Efficiency and the Environment." Working Paper Series No. 972. The World Bank. Washington, D.C. Bohi, Douglas R. (1981) "Analyzing Demand Behavior - A Study of Energy Elasticities.' Resources for the Future. The Johns Hopkins University Press, Baltimore. Burgess, Joanne C. (1990) "The Contribution of Efficient Energy Pricing to Reducing Carbon Dioxide Emissions." Energy Policy, 18(5):449-55. Churchill, A.A. and Saunders, R.J. (1991) "Global Warming and The Developing World." Finance and Development, June. Energy Information Administration (1991): International Energy Annual 1989. DOE/EIA-0219 (89). U.S.A. International Monetary Fund (1991): International Financial Statistics (various issues). Washington, D.C. Haugland, T and Roland, K. (1990) "Energy, Environment and Development in China." Report 1990/17. The Fridtjof Nansen Institute. Norway. Hoeller, P. and Wallin, M. (1991) "Energy Prices, Taxes and Carbon Dioxide Emissions." Working Paper No. 106. Economics and Statistics Department. Public Economics Division. OECD, Paris. Hughes, Gordon (1991) "The Impact of Economic Reform in Eastern Europe on European Energy Markets." Sunmmary of a paper given at a conference on New Developments in the International Marketplace in Amsterdam on November 14th-15th 1991. International Energy Agency (1991): Energy Prices and Taxes 4/1990. OECD, Paris. Kosmo, Mark (1989) "Commercial Energy Subsidies in Developing Countries." Energy Policy, June:44-53. Larsen, Bjorn and Shah, Anwar (1992a) "Tradeable Carbon Emissions Permits and International Transfers." Presented at the 15th Annual International Conference of the International Association for Energy Economics, Tours, France, May 18-20, 1992. Larsen, Bjorn and Shah, Anwar (1992b) "Combating the Greenhouse Effect." Finance and Development, December, 1992 (forthcoming). IMF, Washington, D.C. Nordhaus, William D. (1991) "To Slow Or Not To Slow: The Economics of The Greenhouse Effect." The Economic Journal, 101(July):920-37. 24 O'Connor, Brian (1991) "Soviet Energy: Supply and Demand by Republic." EUENEC Consultancy Ltd. Sussex. England. Shah, Anwar and Larsen, Bjorn (1992a) "Carbon Taxes, the Greenhouse Effect and Developing Countries." Working Paper Series No. 957. The World Bank. Washington, D.C. Shah, Anwar and Larsen, Bjorn (1992b) "Global Warming, Carbon Taxes and Developing Countries." Presented at the 1992 Annual Meetings of the American Economic Association January 3, 1992, New Orlears, USA. Sterner, Thomas (1989) "Oil Products in Latin America: The Politics of Energy Pricing." The En=gy Journal, 10(2):25-45. Summers, Lawrence H. (1991) "The Case For Corrective Taxation." The National Tax Journal, September. Vol. XLIV, No. 3:289-292. Summers, R. and Heston, A. (1991) "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-88." Ouarterly Journal of Economics, 106:327-68. World Resources Institute (1990): World Resources 1990-91. Washington, D.C. 25 APPENDIX A ALTERNATIVE ENERGY EFFICIENCY SCENARIOS AND REDUCTIONS IN CARBON EMISSIONS It is instructive to note the potential for reductions in global carbon emissions under three alternative standards of energy efficiency: the Japanese, the German, and the American standards. Table A presents statistics on carbon emissions per dollar of GDP or PENN GDP.8 Note that the rankings of the three countries remain unchanged under the different measures of GDP, but the U.S. fairs poorly compared to the world average in terms of energy efficiency on account of the GDP measure adjusted for purchasing power parity. If the world were to adopt Japanese or German standards of energy efficiency, remarkably large reductions in global carbon emissions could be achieved. However, given the significance of the composition of fossil fuel use, a note of caution is in order. For example, if Japan, the USA and Germany are below the world average in terms of (i) the ratio of coal emissions to total emissions, and (ii) the ratio of petroleum emissions to total emissions, global carbon emission reductions will not be as high as stated in Table A. This is because coal and petroleum products have a higher carbon content per unit of energy than natural gas. This concern may not be relevant in the case of West Germany and the USA because their fossil fuel composition is about the same as the world average. However, in the case of Japan, which has a lower coal use than the world average, the potential for emission reductions is to some extent overstated. It is also worth noting that to achieve German or Japanese standards of energy efficiency, developing countries would have to raise the relative prices of fossil fuels to similar levels - possibly through energy or carbon taxation. Such a change in relative prices would have to be carefully evaluated on a country by country basis. 'PENN GDP is GDP adjusted to purchasing power parity (Summers and Heston 1991). 26 Table A Global Carbon Emission Reductions from Fossil Fuel Combustion Under Alternate Energy Efficiency Scenarios 1987 Carbon Efficiency: C02/GDP * C02/Penn GDP ** (kg/USS) (Kg/USS) Japan 0.10 0.16 West Germany 0.16 0.17 United States 0.28 0.28 World 0.31 0.27 (weighted average) Global carbon emission reductions if all countries in the world had carbon emissions per dollar of GDP similar to: Japan West Germany United States Under UN National Accounts GDP 68% 48% 10% Under PENN (PPP adjusted) GDP 41% 37% 0.4% *** Notes: * UN National Accounts GDP ** UN National Accounts GDP adjusted for Purchasing Power Parity *** Increase Source: Authors' Calculations 27 APPENDIX B DATA SOURCES AND STATISTICAL TABLES Dot sources: Asian Development Bank (1989): Energy Indicators of Developing Member Countries of ADB. Manila, Philippines. Bates, R. and Moore, E. (1991) "Commercial Energy Efficiency and the Environment." Background Paper No. 5. World Development Report 1992. The World Bank. Washington, D.C. Energy Information Administration (1991): International Energy Annual 1989. DOE/EIA-0219 (89). U.S.A. International Monetary Fund (1991): International Financial Statistics. Washington, D.C. Haugland, T and Roland, K. (1990) "Energy, Environment and Development in China." Report 1990/17. The Fridtjof Nansen Institute. Norway. International Energy Agency (1991): Energy Prices and Taxes 4/1990. OECD, Paris. O'Connor, Brian (199.1) "Soviet Energy: Supply and Demand by Republic. " EUENEC Consultancy Ltd. Sussex. England. World Resources Institute (1990): World Resources 1990-91. Washington, D.C. 28 Table Al. Carbon Emission Reductions from Removing Subsidies on Fossil Fuels The Case of Coal No world price effect: World PriCC effect: dometic domestic erission emission net emission consumnption prce own emission reductions increase emission reduction 1997 million to border price reductions to toal firm rllt reductions to total metric tons orice elasticity (000 ) emissions in wodd ice 1 n emissions China 1112 0.84 (1989)' 0.60 47577 10% 21638 25939 5% Former USSR 884 0.10 (1992) 0.15 1OU40 29% 3296 105144 28% Poland 281 0.30 (1990) 0.20 23240 2t% 1427 21813 20% India 232 0.86 (1991)' 0.60 9387 9% 4971 4416 4% Germuny, East n.a. n.a. South Africa 161 0.50 (1991) 0.25 10596 16% 1170 9426 14% Czecboslovakia 150 0.30 (1990) 0.20 9887 21% 607 9280 20% Norlh Kore 66 n.a. n.a. n.a. Total 2886 209127 33110 176017 Non-sul'sidizen 2699 0.8 75755 -75755 Word 5585 209127 108865 100262 Reductions as % of wodd emissions 9.0% 4.3% Source: Authow' calculations. Table A2. Carbon Emission Reductions from Removing Subsidies on Fossil Fuels. The Case of Natural Gas No regional price effect: Regional price effect domestic domestic emission emission nut emission consumption price own emission reductions increasc emission reductions 1987 to border price reductions to total frm fill in reductions to tot (billion cu m) price elasticity (000 emissions renional oricc (000 nt) emissions Fonemr USSR 636 0.07 (1992) 0.15 99470 33% 7253 92217 30% Ronania 39 n.a. U.S. n. Mexico 24 naa. n.a. n.a. Saudi Arabia 26 n.a. n.a. n.a. Venezuea 18 n.a. n.a. n.a. Argentina 17 0.50 (1989) 0.25 1591 16 1591 16% Algeria 17 Iran 15 na. na.. n. China 14 0.40 (1986) 0.20 1222 17% 1222 17% United Arab Emirates 14 Poland 13 0.50 (1990) 0.25 87S 16% 276 600 11% TOal 833 1031S8 7528 95630 Non-subsidizes 317 0.8 28917 -28917 World 1867 103158 36446 66713 Reductions as % of world emissions 11.6% 75% Source: Authors' calculations. Table A3. Carbon Eniission Reductions from Removing Subsidies on Fossil Fuels: The Case of Petroleum Products (subsidized products only) No wodd price effect: Word price ence dometic domestic emission emision net emission consumption price own emission reductions increae emission reductions 1987 to border pice reductons to total from fal in redwtion to totl (million tonr) ce elasticit 000 mt) emissons word (000 Olemt Foimer USSR 448 0.05 (1992) 0.15 122778 36% 2077 120701 35% Chlins 103 0.48 (198S) 0.25 14015 17% 1113 12902 15% Mexico 76 0.54 (1990) 0.25 5538 10% 838 4701 8% Brazil 63 0.53 (1990) 0.25 4160 11% 546 3613 9% India 49 0.47 (1990) 0.25 1391 4% 517 874 2% Saudi Arbia 44 0.60 (1990) 0.30 2910 9% SS8 23S1 7% 11aj1 43 n.a. n.a. n.a. Indona 25 0.5O (1990) 0.25 3189 15% 278 2911 14% Argentina 24 0.48 (1990) 0.25 2137 13% X8 1900 11% Egypt 22 050 (1992) 0.2S 2032 13% 223 1809 11% Romania 17 na.. na. na. Germnay, East 17 Da. na.. na.. Czechosovakia 16 0.22 (1990) 0.20 461 4% 15S 306 2% Venzuel 20 0.18 (1990) 0.20 36il 29% 113 3508 28% Bulgaria 14 na.. n.. n.e. PolAnd 17 0.68 (1990) 0.35 996 9% 237 759 6% Total 998 163229 6894 15633S Non-bsidizers 2142 0.8 81341 WorM 3140 163229 88236 74994 Reductios a % of wodd emaink 7.1% 3.27% Souncs: Ambo' cakuAlaon. Pollcy Research Working Paper Series Contact Title Author Date for paper WPS977 Income Security for Old Age: Estelle James September 1992 D. Evans Conceptual Backg,ound and Major Issues 37496 WPS978 How Restricting Carbon Dioxide Charles R. Blitzer September 1992 WDR Office and Methane Emissions Would Affect R. S. Eckaus 31393 the Indian Economy Supriya Lahiri Alexander Meeraus WPS979 Economic Growth and the Dennis Anderson September 1992 WDR Office Environment 31393 WPS980 The Environment: A New Challenge Piritta Sorsa September 1992 WDR Office for GATT 31393 WPS981 After Socialism and Dirigisme: Andres Solimano September 1992 S. 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Nadora Programs 31091 WPS997 How Financial Liberalization in John R. Harris October 1992 W. Pitayatonakarn Indonesia Affected Firms' Capital Fabio Schiantarelli 37664 Structure and Investment Decisions Miranda G. Siregar WPS998 What Determines Demand for Freight Esra Bennathan October 1992 B. Gregory Transport? Julie Fraser 33744 Louis S. Thompson WPS999 Stopping Three Big Inflations Miguel A. Kiguel October 1992 R. Luz (Argentina, Brazil, and Peru) Nissan Liviatan 34303 WPS1000 Why Structural Adjustment Has Not Ibrahim A. Elbadawi October 1992 A. Maranon Succeeded it, Sub-Saharan Africa Dhaneshwar Ghura 39074 Gilbert Uwujaren WPS1001 Have World Bank-Supported Ibrahim A. Elbadawi October 1992 A. Maranon Adjustment Programs Improved Economic 39074 Performance in Sub-Saharan Africa? WPS1002 World Fossil Fuel Subsidies and Bjorn Larsen October 1992 WDR Office Global Carbon Emissions Anwar Shah 31393 WPS1003 Rent-Sharing in the Multi-Fibre Kala Krishna October 1992 M. T. Sanchez Arrangement: Evidence from U.S.- Ling Hui Tan 33731 Hong Kong Trade in Apparel WPS1004 Family Planning Programs in Sub- Regina McNamara October 1992 0. Nadora Saharan Africa: Case Studies from Therese McGinn 31091 Ghana, Rwanda, and the Sudan Donald Lauro John Ross WPS1 005 An Approach to the Economic Laszio Lovei October 1992 M. Dhokai Analysis of Water Supply Projects 33970